Payroll Articles
Flexible Spending Arrangement
Flexible Spending Account (FSA) for Unreimbursed Medical, Dental and Vision Expenses
In a manner similar to the above program, Employees may reduce their salaries for the upcoming plan year (or mid-year for a new Employee) to fund for the above unreimbursed expenses. No differentiation is made in the plan between medical, dental, and vision expenses. Reduced salary not used at the end of the plan year is lost to the Employee. The actual language of eligible expenses is found in the Internal Revenue Code, Section 213(d). It refers simply to medical care "for the diagnosis, care, mitigation, treatment, or prevention of disease or for the purpose of affecting any structure or function of the body." Section 213(d) also includes transportation expenses primarily for the above medical care as well as medical insurance premiums. (Note: proposed regulations prevent the Employee from using this plan to pay the premiums of another employer's plan.)
From an administrative standpoint, the
FSA is more likely to cause problems for the employer than the dependent care program because the latter expenses are much easier to predict and thereby there is less chance for money to be lost at the end of the year. Employees who reduce their salaries by large amounts to pay for predicted unreimbursed medical, dental, and vision expenses and lose a large amount of money because of inaccurate predictions could become very disgruntled. For that reason, we generally do not recommend that employers include a medical care FSA in their Section 125 plan the first year.
Note: In March, 1989, the IRS issued proposed Cafeteria Plan regulations which make the employer liable for the entire medical care FSA amount, even if that far exceeds the amount of salary thus far reduced. For example, and Employee who reduced his salary by $200/month for projected unreimbursed medical, dental or vision expenses would have a potential annual benefit of $2,400. Under the proposed regulations, the employer could be forced to pay a $2,400 medical bill the first month, even if the Employee terminated soon after. This makes medical care FSAs riskier than ever for employers.